All eyes on US to put its financial house in order

By
Joseph C. Harsch /
November 13, 1987

Washington was finding it extremely difficult and most unpleasant over this past week to take the bitter medicine that it has so often in the past prescribed to others. The West Germans, the Japanese, and even ``best friend'' Margaret Thatcher of Britain were telling Ronald Reagan to put his own house in order, reduce his deficit, cut down on spending at home, and live more frugally before they would come to his financial rescue.

This is precisely what the Reagan administration, either directly or acting through the International Monetary Fund, has so often said to Brazilians, Mexicans, and others who for too long had been funding economic expansion programs at home on borrowed funds.

Now the United States is the world's heaviest debtor. It is in financial trouble. Its creditors are beginning to take their money home. The big news during the second half of October was the collapse of prices on the world's major stock markets. The big news during the first half of November has been the decline in the value of the dollar.

The crucial date was Nov. 4. On that day, US Treasury Secretary James Baker III told reporters that he did not intend to risk an economic recession in order to defend the dollar. Major US banks lowered their interest rates from 9 percent to 8 percent on Nov. 5. The dollar dropped to new postwar lows, before recovering at week's end.

Many of us can remember when a dollar would buy four Swiss francs and even more than four German marks. This last week the dollar could buy only 1.3 Swiss francs and 1.7 German marks. Financial writers were talking about the ``free fall'' of the dollar. It was not being supported at an agreed level either by the US Treasury or by international bankers.

All eyes were turned to a room on Capitol Hill in Washington where deputies from the Reagan White House huddled daily with people from the House and Senate trying to work out an agreed cut in the federal deficit.

Perhaps the most interesting and in the long run most significant development of the week was the reluctant agreement of the White House delegates to the idea of some increase in taxes.

President Reagan has defended his tax cuts more stubbornly than any other of his original policies and has asserted many times in the past that he would not allow tax increases. Last week, his deputies had accepted at least the idea that some part of the deficit will have to be cut by increased federal revenue.

How much remains to be determined. Originally, when the White House first agreed to the emergency deficit trimming operation, the idea was to try to meet the crisis by a modest trim of not more than some $23 billion this year. But that was before the fall in the dollar had become the week's top news story and touched the awareness of Mr. Reagan, who was prompted to say Nov. 10 that he does not ``want a further decline of the dollar.''

By this weekend, most expert observers had agreed that if the dollar is to be stabilized at even its present level (the lowest since World War II), the deficit will have to be trimmed by more than $23 billion. Many quarters suggest that a better target would be $50 billion.

The central question is whether the US will in the long run fund its debt by frugality or by inflation. Were Washington to pursue the remedy it has recommended to other debtor countries, the President would be cooperating with Congress in a radical program of tax increases and spending cuts to balance the federal budget and the trading account.

So far, there is no evidence of a decisive will in Washington to travel down the frugality road. By keeping interest rates down, thus making money more available, the administration is in fact inflating the currency. The phrase used is ``providing sufficient liquidity.'' It is a euphemism that means more dollars at a lesser value for each dollar.

The Reagan administration is in retreat on more than the tax front. It failed for a second time over the past week to put a candidate of Mr. Reagan's own ideological views onto the Supreme Court. The great hope of the administration was that during the eight years of its tenure it would be able to replace all liberals on the court with persons who would qualify as Reagan-type conservatives.

The court has tended to vote against Mr. Reagan's views during most of his administration by a 5 to 4 split. There is now a vacancy. If only that vacancy would be filled by a true Reaganite, the majority might become 5 to 4 in favor of his views. With Mr. Reagan's announcement of his intent to nominate Judge Anthony Kennedy, a moderate conservative, it is not clear this goal will be achieved.

In foreign policy, the retreat is almost complete. Nicaragua's President has been pressing for a meeting with Mr. Reagan. The White House stiffly insists that under no circumstances will this be granted. But Secretary of State George Shultz has accepted the possibility of meeting with this arch enemy, provided Nicaragua's President will fulfill his own obligations under the peace plan for Central America.